The absolute impact of reduction in the Cash Reserve Requirement (CRR) by central bank has not been witnessed and money market is still facing liquidity crunch, as the overnight call rates still stood at high of 29 percent, banking sources told Business Recorder here on Monday.
They said that some Rs 31 billion was injected in the banking system on Saturday as the State Bank of Pakistan (SBP) reduced CRR by one percent, however the banks are still facing liquidity shortage and need more cash to meet their customers demands.
The banks have been facing huge liquidity shortage for the last few weeks and liquidity constraint in the system has caused increase in overnight call rates, touching high level of 40 percent in money market.
During last week the SBP taking bold and sudden step announced reduction in the CRR by 200 bps to 7 percent from 9 percent in two phases effective from October 11 and November 15.
Sources said that banks were expecting that liquidity shortage and overnight call rates would ease with the recent SBP's move, enabling them not to acquire money on higher rates from other banks.
But the overnight call rates on Monday still stood at a high level of 29 percent due to the huge demand of money by the small banks to fulfil their commitments and customers' payments. While big banks are taking full advantage of present liquidity shortage and offering higher overnight call rates, they added.
They said that on Monday a leading bank also offered a call rates of 30 percent, however no transaction was made on this offer and highest overnight rates remain at 29 percent. While, the lowest overnight call rates in the money market was 15 percent and average rates was 22.50 percent.
Sources said that due to the liquidity crunch central bank has reported discounting of Rs one billion on Monday, besides injecting some Rs 35.35 billion through Reverse Repo Open Market Operation at 12 percent.
The injection and discounting also reflect that banks are facing huge shortage of cash for the routine dealing, they said. "Market is still facing liquidity issue, which would take some time to end, however some positive indication has been witnessed due to central bank measures and overnight rates has decline from 40 percent," said Aftab Manzoor chairman Pakistan Banks Association.
He said that the large banks are not taking benefit of present liquidity shortage and PBA has already instructed the banks to play their role in a positive manner.
The SBP is continuously monitoring the whole situation and another reduction in the 100 bps in the CRR from November 15 would help further reduce the overnight call rates and increase the liquidity in the market, he added.
Meanwhile, Muzamil Aslam, an economist said "in the current scenario the top five banks are relatively comfortable on liquidity; but the risks of deposit redemption and counter party "deposit vulnerability" are keeping big banks from lending to smaller banks".
At present, it required that SBP should help ease the liquidity crunch for medium and smaller-size banks either through a further cut in CRR rates, or by lowering the CRR limit from the current one-year deposit to three months, they suggested. He said that this stance was most recently adopted by China in September when the CRR rates was cut by 100bp for all banks, except the top five banks. Muzamil said that the advantages of this move are including higher deposit mobilisation, and ease of domestic liquidity and hence, balanced money market rates.